Microsoft (MSFT) makes products that corporations need and consumers want.
Although it is considered “old tech” by some, it is an innovative company that is still growing strongly. It has a very wide moat, and it boasts a pristine balance sheet.
Bottom line: Microsoft is one of the most valuable businesses in the world — indeed, one of only two with a trillion-dollar market cap — for a simple reason: It is among the best companies in the world.
The One & Only
My boss here at Daily Trade Alert gave me a pretty audacious assignment, asking me to write an article that answers this question:
Which stock would you choose if you only could own one?
As a strong believer in diversification and as an investor who has lived through several recessions, I get the willies just thinking about having a one-stock portfolio.
So rest assured … none of us at DTA is suggesting that any investor have Microsoft (or any other single company) as one’s only holding.
I took this as an exercise in judgment and analysis … and yes, I accepted it as a challenge. If I was going to pick only one stock, it had better be a darn good one.
Microsoft certainly is that, and more.
Then … And Now
Not all that long ago, Microsoft was primarily a software company, selling floppy disks loaded with Windows and Office.
It was a highly profitable business, turning college dropouts Bill Gates and Paul Allen into two of the world’s richest people.
As the computing universe changed, however, MSFT was slow to adapt. While competitors were embracing “the Internet of things” and going mobile, Microsoft was still hawking Windows and Office disks for PCs.
Attempts to innovate — from Zune to Vista to “Bob” to Cortana to Bing — gained little or no traction.
Steve Ballmer, who succeeded Gates as CEO in 2000, made himself a ton of money, but the company’s reputation was taking a beating, and its stock price languished.
When Satya Nadella replaced Ballmer as CEO in 2014, he was faced with the herculean task of turning an old tech company back into a relevant, vital operation. He has succeeded spectacularly.
As executive vice president of the company’s Cloud and Enterprise group before becoming CEO, Nadella oversaw the beginnings of Microsoft’s transformation to the cloud infrastructure and services business.
This slide from the 2020 first-quarter earnings presentation shows just how much the cloud has grown under Nadella’s watch:
Microsoft’s main set of cloud services, called Azure, has become indispensable for hundreds of companies, and it is closing the gap on market-leading Amazon Web Services.
For example, MSFT scored a major victory in October when it beat out Amazon (AMZN) for the Pentagon’s JEDI cloud computing contract.
In another recent “get” for Microsoft, Salesforce (CRM), a $143 billion technology company, moved its marketing cloud service from its own infrastructure to Azure to “accelerate customer success.”
Nadella and his team also changed the way most companies and individuals receive Office products.
Rather than buying disks they would keep until an update would become available, customers now purchase annual subscriptions that must be renewed.
As Morningstar Investment Research Center said:
Microsoft’s Office tools remain the most heavily used productivity suite in the world; the firm commands a monopolistic position in on-premises deployments and has quickly amassed leading share in cloud-based productivity software deployments. Office’s scale is unmatched, with more than 1 billion people using the software around the world. … While Google made its mark with web-based office applications, Office 365’s superior feature set has yielded much swifter and broader adoption, evidenced by Office 365’s rapid ascension to the most heavily used cloud-based application suite today, surpassing Google’s once-leading position despite Google’s multiyear head start as a cloud-based suite.
The Windows 10 operating system has been a major hit with customers, and the X-Box gaming system and Surface tablet also contribute to Microsoft’s success story.
The following FAST Graphs earnings illustration shows that despite a few rough patches, MSFT has had only three losing years in the last two decades (red-circled areas).
Meanwhile, the blue-circled area shows the double-digit annual EPS growth that is expected over the next few years.
Given that it is the only stock I’m going to own (in this exercise, anyway), that’s important.
Value Line awards MSFT its highest scores for Financial Strength (A++) and Safety (1). Along with Johnson & Johnson (JNJ), Microsoft is one of only two companies in the world to receive the ultimate AAA credit rating from Standard & Poor’s.
Income Production, Too
My primary strategy is Dividend Growth Investing, so I like that Microsoft’s dividend has increased substantially over the last decade.
In September, the company announced an 11% dividend raise, boosting its quarterly, per-share payment from 46 cents to 51 cents. At the same time, the Microsoft board authorized up to $40 billion in share repurchases.
With its ability to generate free cash flow, its low payout ratios and its extremely low debt, Microsoft gets a Dividend Safety score of 99 (out of 100) from Simply Safe Dividends.
The stock’s price surge over the last few years has pushed the dividend yield below 1.5% … but that’s a very pleasant “problem” to have.
You’ll never hear me say, “Oh no, Microsoft is making me too much money!”
Wrapping Things Up
Before settling on Microsoft, other stocks I considered for this exercise included Disney (DIS), NextEra Energy (NEE), Visa (V), Mastercard (MA), McDonald’s (MCD), Lockheed Martin (LMT), Alphabet (GOOG) and Johnson & Johnson.
My portfolio holds all of those companies, and I doubt long-term investors would go wrong with any of them. Nevertheless, I kept coming back to MSFT as the one I’d own if I only could own one.
I also have selected Microsoft twice for our Income Builder Portfolio, most recently in October.
We are putting $2,000 a month into high-quality, dividend-growing stocks, and we encourage fellow investors to follow the IBP’s progress HERE.
— Mike Nadel
Marc Chaikin built the system that isolated NVDA before it became the best-performing stock of 2023. Click here to get his latest buy. More here.